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Ant’s IPO debacle and the fate of platform finance

Embedded finance depends on the data-for-balance-sheet model that Beijing is now determined to control.

Jack Ma

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The reckoning between China’s government and its internet giants has come to a head with the abrupt postponement of Ant Group’s dual listings in Shanghai and Hong Kong.

To pull the world’s biggest IPO, set to raise a combined $35 billion, just two days before pricing makes Beijing’s regulators look capricious and humiliates Jack Ma, Ant’s controlling shareholder.

The fallout could reach the global fintech community as well.

Simmering disputes

The tussle between the Communist Party and China’s leading internet companies has been long in the making.

In 2018 the People’s Bank of China made a group of leading tech companies including Ant and Tencent shareholders of Baihang, the country’s only unified national system for credit data. The idea was to make it easy for the fintech companies to hand over their uniquely huge troves of consumer data.

The tech players have not complied, according to local media reports.

The government has also considered antitrust actions against them, suspecting them of using their enormous sway in the $7.6 trillion online payments industry to fend off competition.

This year’s piloting of a digital renminbi is chiefly designed to assert government authority over Ant and Tencent’s private, closed-loop financial systems.

In the wake of these actions, the tech players have created vast new businesses serving the hundreds of millions of people and small businesses that have largely gone ignored by banks.

Internet finance

Ant uses its unique insight into users of its e-commerce and other businesses, bundled in one payments app, to create risk and credit models that don’t rely on financial statements or credit bureaus. Tencent does the same through WeChat.

These companies depend on commercial banks to provide loans. Ant facilitates Rmb300 billion in loans, but puts up only 2 percent of its own capital, about Rmb3 billion.

These are the biggest platform models in the world, but the principles behind them are universal.  They underpin the open-banking trend sweeping the world. The concept of “embedded” or “invisible” finance is predicated on exchanging customer data and access for balance sheet. What happens to fintech businesses if platforms are no longer just tech layers, but credit providers?

The Chinese government has legitimate concerns about over-concentration of data and market power, and the threat these companies pose to the commercial banking system.

Showdown

In this light, Jack Ma appears to have been reckless in making disparaging remarks in front of senior regulators and Party officials on October 24, accusing banks and a “pawnshop mentality” favoring collateral over data, and regulators of hampering innovation through red tape.

His words were initially aimed at the risk protocols of the Bank of International Settlements but ended up directed at China. Angry regulators responded two days before Ant’s IPO with the PBoC rushing through rules requiring platform operators contribute at least 30 percent of capital to lending activities. This material change to the company’s fortunes forced it to suspend its dual listing.

It’s possible Ma was rash; it’s also possible he saw the writing on the wall and wanted to impose a price for his subjugation.

Consequences

Investors probably dodged a bullet: the vast majority of the IPO proceeds may have been earmarked as reserves instead of being invested into research or business development. Whenever Ant does return to the equity markets, investors will see a less profitable business.

The big unknown is why the fallout occurred in such a messy, public manner, causing loss of face all around. The authorities could have prepared tech companies for this. They could have negotiated more nuanced protections, risk limits, data protection rules, and so forth.

Instead Beijing chose the sledgehammer of reserve requirements – basically deciding tech platforms must be regulated in the same manner as banks.

China is not the only country where regulators fear Big Tech. Its example of platform models terrifies global banks and their monetary supervisors with the prospect of becoming mere “dumb pipes” within digital ecosystems.

Beijing has just set a precedent for the BIS and other regulators to justify intervening in the platform model, should they choose to look for one.

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Ant’s IPO debacle and the fate of platform finance